Italians Bristle At The Price Of Financial Help
This week, Italy became the front-line in the battle to save the euro.
But it isn't the Italians taking the lead. With indecision in Rome, the European Central Bank took the unprecedented move of dictating budget-cutting policies to the third largest economy in the euro-zone.
Prime Minister Silvio Berlusconi will now have to accelerate tough austerity measures in exchange for help to solve the country's debt crisis.
A week ago, Berlusconi was telling parliament in Rome that the Italian economy was solid. And he expressed confidence that Italy could deal with its huge debt – 120 percent of GDP, the second largest in the euro-zone.
At the same time in Frankfurt, the president of the European Central Bank Jean-Claude Trichet, and the man who will soon succeed him, the Italian Mario Draghi, were drafting a letter to Berlusconi.
It reportedly listed in meticulous detail what Italy must do to sharply reduce its debt mountain, specifying legislation and a precise timetable.
In exchange, the ECB would help by buying Italian treasury bonds whose yields have hit record and unsustainable levels.
As soon as he got his new marching orders, Berlusconi promised to deliver.
Italy Faces Tough Cutbacks
Financial analyst Danilo Caselli says with that letter, the government's decision-making powers were sharply cut back.
"It's clear that our government has been put into receivership by the European Central Bank", says Caselli. "Our course has been charted. All Italians will have to undergo very painful austerity measures for the next three years. The question now is to see exactly what they will be".
According to the Italian media, the list of measures — many of which are to be imposed by decree — include privatization of state-owned companies, much more flexible labor market rules, and sharp cuts in government spending.
Berlusconi faces daunting opposition. Labor leaders are on the warpath against possible pension and health care cutbacks. They're demanding much tougher action against tax evasion, a chronic problem in Italy.
Unions also want to see drastic cuts to the salaries and perks of some 150,000 politicians. Business leaders are also worried that more austerity measures will further curb economic growth, which has been stagnant for a decade.
"What is really needed is a hefty tax on wealth, which will substantially help balance the budget," says Massimo Muchetti, an editorial writer for Corriere della Sera, a leading newspaper. "But you need credibility to impose that. And this government does not have a sufficient stock to ask for help from its citizens."
Deal Raises Questions of Sovereignty
Berlusconi has been uncharacteristically silent for the last several days. He has come under sharp criticism for ceding policy-making to the ECB
"A country that is under surveillance is not free, not democratic, and is incapable of instilling respect in its institutions," says opposition leader Antonio Di Pietro. "The only solution is for Berlusconi to step down".
There is also concern within Berlusconi's own party at the sudden turn of events.
"It is worrisome to think that the European Central Bank can put a country into receivership – be it Italy, Greece or whatever", says Guido Crosetto the undersecretary of defense. "And in coming months we will have to ask ourselves whether national sovereignty still has any meaning."
The ECB's expansion of its operations surprised some of Italy's European partners. Several German analysts said that by buying up troubled bonds, the ECB is giving up its main role, fighting inflation.
And some Europeans may fear that an increasingly bold European Central Bank could threaten the tightly guarded national sovereignty of all EU member states.